Dollar holds near 87USc after sell-off as RBNZ 'pauses' mulled

The New Zealand dollar held near 87 US cents, having shed more than 1 US cent yesterday, as traders mulled the prospects of a pause in the Reserve Bank's tightening cycle given milder-than-expected inflation, weak dairy prices and a trade-weighted index stubbornly higher than the RBNZ expects.

The kiwi traded at 87.09 US cents at 8am in Wellington, from 86.98 cents late yesterday. It has tumbled from more than 88 cents the previous day. The trade-weighted index was at 81.16 from 81.04 yesterday.

Swap rates dropped after the cluster of new information yesterday. Traders still expect governor Graeme Wheeler to raise the official cash rate a quarter point to 3.5 percent next week and are debating how long he may wait before hiking again. Non-tradable inflation, which measures prices not directly exposed to the kiwi dollar, was 0.4 percent in the second quarter, almost half the pace the central bank had expected. Meantime, a further slump in dairy products this week has economists anticipating the economic cycle may peak at a lower level given the dominance of commodities in the nation's export receipts.

"We still consider a July rate hike effectively a done deal, since we can't imagine the RBNZ would be pleased with market interest rates falling further," said Raiko Shareef, currency strategist at Bank of New Zealand. "The market is much more comfortable with the idea of an extended pause thereafter, which gels with our view.

"Formally, we expect pauses in both the September and October meetings, followed by a 25 basis point rate hike in December. But the risks are now heavily skewed towards the latter becoming a pause, too," he said. "Unless the NZ TWI falls in line with the RBNZ's expectations in quick order, the growing disconnect between that and NZ commodity prices will weigh on the bank's interest rate projections."

The Reserve Bank had forecast the TWI to average 80 in the second quarter and 79.7 in the current three months. Wheeler has called the currency "unsustainably high" given the slide in commodity export prices.

Bank of New Zealand says support for the kiwi now kicks in at about 86.50 US cents and resistance at 87.50 cents.

The kiwi rose to 64.40 euro cents, partly reflecting the European currency's weakness against the greenback, from 64.14 euro cents late yesterday and edged up to 50.83 British pence from 50.76 pence. It traded at 88.59 yen from 88.49 yen fell to 92.94 Australian cents from 93.13 cents.

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